There's this article in the latest Outstanding Investor Digest that I am just so thrilled with -- a transcript of a client presentation by Arnold Van Den Berg of Century Management. He makes a lot of good points about how the US economy and stock market are pretty far out of sync, on common-sense measures as well as historical measures.

But the question here has to do with one of the charts in the article, which shows the price of gold from 1970 (before the dollar was allowed to float) to now. There is of course a giant peak in gold value to $850/oz in 1980 or so, followed by 2 years of decline to around the $400 level and ever since then it has oscillated a bit up and down.

It's currently at $426 (that's where the chart ends, I think it's end 2003) and that's a result of a runup from slightly under $300 in 2000 or 2001. So it seems like maybe it's already had a run up.

But if I take today's $426 price and run it backwards in time and include inflation I find that today's $426 price corresponds roughly to 1975's $160 price, or 1979's $180 price. This is pretty cheap! So maybe gold isn't far from its historical low since the gold standard was abandoned.

Where would be a good starting point for learning about the precious metals market and what drives it? And how to assess value, vs. price?

Does anyone else think this might be something interesting to look at?

Does anyone else think this might be something interesting to look at?

At one time I would have answered otherwise. However, I look at the precious metals market for job opportunities. These oscillations you mentioned last about 6 months to 2 years. They are irregular (isn't not a cyclical thing). So it's not stable enough to rely on for career options. One year everybody is living like kings and it's a job seekers market (like right now...see http://www.infomine.com/ and look in the employment listings). Next year, they have massive layoffs and cut salaries.

That being said, the "precious metals market" is more than just gold, and that makes a huge difference. Certain metals (palladium and the other members of that group) have very useful chemical uses in catalysts. The primary market maker in that business is EC, who hedges in that business because they are also one of the largest catalyst manufacturers.

Other minerals (okay, precious metals) do not fit the gold model. Although it might be tempting to think of the silver and platinum markets as simply the "poor man's" and "rich man's" gold markets, the analogy doesn't work. Those metals have much more useful industrial functions compared to sitting in your safe at home.

The gold consumers (in the traditional sense) tend to use very, very little of what's out there. The major producers (mining companies) all have a break-even cost of around $250/oz. Also, most of the modern production techniques have almost no variable costs (almost everything is a fixed cost). This means that regardless of production rates, the cost to produce is about the same. So, if prices are >$250/oz., they make money. Otherwise, they lose their shirts. The fixed cost problem doesn't really apply to most other minerals because most of the time, the ore bodies are not so low grade.

The end result is that the only real driving force in the gold "market" is people (governments, private individuals, etc.) who are speculating in it. The actual underlying producers and consumers simply don't matter. The end result is that the entire gold market is essentially speculation at it's finest!

You are attempting to understand the mechanics of the market in the traditional sense. It simply doesn't fly. There is little to no real "market" to speak of. People can talk about this or that large bank buying up gold or flooding the market with gold, or whether economic downturns fuel increases in prices, but again it's nothing but a speculation market.

You can read up on all of the minerals that the USGS publishes data for annually here:

It isn't always exactly what you are looking for, but it's a good starting point. The yearbooks do an excellent job of describing the overall market (producers and consumers) on a mineral-by-mineral basis.

If you look at the gold minerals yearbook and compare it with virtually all of the other yearbooks, notice the difference in the structure. Most of them talk about changes in the customer base (the buyers), as well as the producers. With gold, there's just a couple paragraphs dismissing the customer base, and then the rest of the article discusses changes in the producers!

Also, since we're on the subject, beware of the non-metallic minerals. Certain ones such as mica and kaolins behave just like metals. However, there are a whole bunch of them which are distinctly different, especially sand, gravel, and aggregates. Once you start getting down below $50-$100/ton or you look at minerals that are extremely common (like sand and gravel), markets are driven by shipping costs more than they are by the intrinsic price of the mineral. This means that all markets become local in nature. For instance, let's say that a ton of aggregate is priced at $10/ton (depending on the specs, this is close to reality). It will cost roughly $10-$20/ton to ship it 50-100 miles, and about $8/ton to produce it. Since aggregates are available virtually everywhere except Florida, it doesn't take long before the price of the aggregate is immaterial. Only shipping costs matter. It also doesn't take long before somebody digs another hole about 50 miles away from the first one and starts selling the same aggregate from that hole. Thus as far as the aggregate market is concerned, all markets are local ones. The same is true for several other minerals. For instance, the "range" on lime and cement ($50/ton) is about 150 miles. The "range" on coal is several hundred miles.

Even though the price is right (about $50-150/ton), kaolin clays do not follow the same trend. Industrially useful clays are somewhat more rare, so some grades enjoy the advantage of national (actually, global) markets. The plastics filler grades have correspondingly local markets, while the high end glossing clays for paper have global markets.

Still other markets are somewhat determined by the few suppliers available. There is a solitary platinum operation in the U.S. (Stillwaters). That operation is not something you'd want to invest in (reminds me of Tyco), but the market is very unusual because of the limited number of suppliers vs. the larger number of buyers.

I use shares of a gold mining company as sort of a hedge against a decline in the value of the dollar. I also happen to believe that the commodity itself offers some interesting opportunities as, until just recently, it had been in a 20+ year bear market.

I have also bought rolls of Silver American Eagle dollars (I only buy them in Brilliant Uncirculated (BU) condition as a further hedge. I buy the silver eagles because they are widely popular and thus easily marketed. I bought all of mine through EBay. If you watch them for a while, you get a feel for what the going price is. I went to Google and searched for bulk coin dealers, found the best (lowest) prices, wrote them down, and then insisted on only buying them through EBay at a 20% discount (including shipping) to those lowest prices. I also made note of the mintages of each year on whatever sites provided them so that I could get more of the rarer ones at a bargain if I found them. I now have two complete roll sets of these and feel that is enough of a hedge for my overall portfolio and the times we find ourselves in.

>>>"It's currently at $426 (that's where the chart ends, I think it's end 2003) and that's a result of a runup from slightly under $300 in 2000 or 2001. So it seems like maybe it's already had a run up."<<<

As someone who has been accused of being a "goldbug", I'll add a few comments. I'll ignore other metals and precious metals because, as noted, gold is somehat different than the others.

I believe you are reading the market wrongly when you post that Gold "oscillated up and down after 1982". Most observers agree that Gold in fact was in a long-term bear market from 1982 until its nadir in late 2000. From a technical perspective the reversal to the current longterm bullish trend proved itself in early 2001 when the POG ( price of Gold ) crossed over the DJI index. ( Did you just hear an echo of a 'bubble' bursting ?)

I believe it is unfair to be dismissive just because there is a large speculative interest. IMO, that can be said of just about any investment sector these days. I've seen 'blue chip' bank stocks rise and fall by 50% in a year! The entire Options market is speculative in nature with spillover ( manipulated ? ) effects on the equities and indexes represented by them.

I'll agree that gold can be used as a hedge against a declining currency. In fact, all commodities that are priced globally in U.S. Dollars are affected to varying degrees by currency fluctuations. If you believe as many do that the Greenback will weaken due to the 'triple deficits' and enormous U.S. debt, then there may be a place for some Gold representation in your portfolio.

Although there is some overlap, Gold investors are roughly divided into 2 camps. One group is composed of those that own physical Gold ... central banks, calamity averse hoarders, manufacturers/jewellery consumers, and traders of coins and bullion. And, of course, speculators who go long or short according to technical indicators ! From this point of view there is no point in small investors owning physical Gold for investment purposes unless they feel the POG will rise relative to their own currency. Many think that when the POG goes up in terms of all major currencies is when we will see a repeat of 1980/1981 POG explosion.

The second group buys and sells mining companies. Relative currency valuations are less of a factor in this sector. That is because miners' stock prices are 'leveraged' to the POG. Just like a software company or a bio-tech, once their cost of operations is covered a large percentage of any POG increase ( or decrease ) is directly reflected on the bottom line. Different from those other 2 sectors, though, The value of their inventory ( i.e. metal in the ground ) also increases immediately. In this last respect, they are more like O&G producers.

Mining companies are valued based on current production ( cash flow ), reserves and resources in the ground ( potential cash flow ), debt and 'forward sales'/hedge levels, and to a much lesser extent earnings history. All the basic qualitative measures such as management competence, etc matter to long term investors, but not to momentum players.

The Miners can be further divided into major producers, smaller or imminent producers, and juniors ( generally still in the exploration stage ). In the first 2 groups, currency fluctuations can be important. For example, until recently short term investment in South African miners have not produced good returns because the Rand has been appreciating against the U.S. Dollar.

The last group is composed of hugely speculative 'penny stocks' since only about one in every thousand initial 'discoveries' eventually becomes a profiatable mine. In this sector one simply must buy a basket of them and actively take profits when the opportunity arises. Or count on being insanely lucky!